Pick n Pay: Struggling Now, But Brighter Days Ahead?

EasyAssetManagement's latest market report highlights Pick n Pay's strategic efforts to address power cuts and low profit margins while aiming for future profitability. Here's why investors might consider the potential for long-term growth despite current challenges.

Pick n Pay is facing some tough challenges. The ongoing power cuts are disrupting their operations and making it difficult to implement their strategic plans. Investors might be overlooking Pick n Pay's potential for future profitability once they overcome these current hurdles and the costs associated with their strategic update.

Their lower profit margins compared to competitors leave them with less wiggle room, and their earnings might fluctuate in the short term. However, we believe the current stock price might be overly pessimistic about these near-term challenges.

Here's why: Pick n Pay is currently trading at a price-to-earnings (P/E) ratio of 16, which is 16% lower than their average P/E ratio over the past ten years. Importantly, this lower P/E ratio reflects their current, lower earnings base. We believe their long-term profitability has the potential to be much stronger.
In short-term, Pick n Pay might be facing headwinds, but there's a chance things could improve significantly in the medium-term. Investors might want to consider this potential when evaluating the current stock price.



Pick n Pay acknowledges the difficulties they face but remains cautiously optimistic about the future. Their turnaround plan targets over 100 underperforming stores, earmarked for closure or conversion to profitable formats like franchises or their successful Boxer discount stores. The group expects financial improvement in the next two years.

This is due to a combination of factors: a profitability boost in Pick n Pay supermarkets, continued strong growth in Boxer and clothing lines, and significantly reduced financing costs from a recent recapitalization effort. They've also streamlined their spending plans, lowering capital expenditure to R2.2 billion annually. This move, well-received by the market, should further improve their financial health. While overall sales growth slowed down slightly year-over-year, there's a positive sign: like-for-like sales (excluding store openings/closures) increased. Their discount Boxer stores are a bright spot, maintaining their strong growth. Pick n Pay's own store sales declined, but they attribute this mainly to strategic store closures.

 Pick n Pay's results might not have met initial expectations, but there are reasons for greener pastures. The profitability of their Boxer discount stores and the expectation of reduced losses in core Pick n Pay stores could lead analysts to revise their profit forecasts upwards. Additionally, lower financing costs are another potential positive factor for their net profit. However, it's important to note that the final impact of their recent rights offering (selling new shares) is still uncertain. This will depend on the exact number of shares issued, which could potentially offset some of the projected gains.
While Pick n Pay's turnaround plan shows promise, there are a few bumps in the road to consider.

Recent staff cuts (rationalisation initiatives) might create challenges, especially in the head office. Analysts worry that this disruption could slow down progress on key projects.

The new CEO's return after a long absence raises some concerns about potential stumbles in executing the turnaround strategy.

Loadshedding, the ongoing power cuts in South Africa, pose a significant risk for Pick n Pay due to their lower profit margins. Running generators to keep refrigerators cool is a major expense. Analysts warn that a worsening loadshedding situation could significantly hurt their earnings.

Pick n Pay's future isn't without challenges, but they are taking steps to address them. Investors should be aware of these potential headwinds as they weigh the potential of Pick n Pay's turnaround plan.

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